7 highlights from EEF's Pharma Bulletin

You may have thought we were running out of manufacturing sectors…well fear not today we published our sixth sector bulletin report in partnership with Santander, this time on the highly dynamic pharmaceuticals sector.

Here are our 7 highlights from the report:

1) The sector is highly volatile, and not correlated with the rest of manufacturing

Pharmaceuticals, given the nature of its products and manufacturing process, is not your typical manufacturing sector. As a result it doesn’t follow the normal “growth path” of manufacturing. This is in stark contrast to say basic metals, as the graphs below illustrate.

But why is this? One possible explanation can be found in the sector’s unusual demand structure, and in particular the make-up of its intermediate demand markets. Unlike most other sectors, pharmaceuticals derives very little demand from other manufacturing sectors, and instead relies predominantly on the “human health activities sector” and itself.

Put simply, the sector does not interact a great deal with other manufacturers. Therefore its growth is not driven by the same forces which move the rest of manufacturing – hence the lack of correlation between performances. The role of patents, and the subsequent patent cliffs also play a role in the sector’s often volatile growth figures.

2) R&D intensive – but its share is declining

Pharmaceutical manufacturers invest heavily in R&D. In fact in 2016 it accounted for almost 27% of total manufacturing R&D expenditure (18.5% of total economy).

However its share is actually declining. Indeed the sector is currently spending in nominal terms 16% less than it did 2011. This is clearly not a good news for the government’s ambitious plan to increase R&D spending intensity to 2.4% by 2027.

3) The North West is the sector’s hub

Given its growing importance and development, it is no surprise that the pharmaceutical sector has a presence across all UK regions. However there is one region in particular where the sector is concentrated – the North West. The region is responsible for a huge 38% of output, and 43% of turnover, significantly more than any other region.

4) Pharmaceutical trade is highly concentrated

The pharmaceutical market is without doubt one of the most important in the UK economy for trade, accounting for 6.2% of total UK trade in 2017.

Yet when digging into the stats we find that trade in the sector is highly concentrated, with our top 10 trade partners making up more than 81% of total trade. The Netherlands and Belgium once again owe their place in the top 10 to the Rotterdam-Antwerp effect. However, another important reason behind the high concentration is related to the strict regulations applied to pharmaceutical markets, meaning trade is predominantly occurring with developed western economies.

5) The NHS is the sector’s most important domestic customer…this brings with it challenges

The NHS is by far the pharmaceutical sector’s greatest domestic customer. However as the NHS is a publically funded organisation, it is unable to afford all of the new products developed by pharmaceutical manufacturers, and so it has to pick and choose which products to buy and distribute free of charge, under a prescription system.

The dynamic of the NHS having to pick and choose which drugs to buy based on their cost effectiveness was amplified recently, when following a number of years of rising costs, the NHS adopted new pricing limits on how much it spends on certain medicines. This has created tensions amongst manufacturers, patients and the NHS for various reasons highlighted below.

6) Technology technology technology

The possibilities of using technology in pharmaceutical manufacturing are almost endless, with great potential to improve efficiency and reduce costs. Whether it be through the use of machine learning and artificial intelligence in preliminary drug discovery and testing, or the role of technology in healthcare apps or wearables (such as smartwatches), the sector is continuing to evolve at a rapid pace. One of the most striking recent developments however is the emergence of digital and personalised medicine.

7) An ageing population represents a challenge…and opportunity for manufacturers

Pharmaceutical manufacturers have a significant role to play in how illness and disability is treated in the future. For instance an aging population will see conditions such as Alzheimer’s disease and Chronic Obstructive Pulmonary Disease surge.

Along with this there will also be heavy over the counter use to battle the aches and pains of aging actively. Pharmaceutical manufacturers will have to develop innovative treatments that fit into the unique needs of an ageing population. The government has itself recognised this, with an ageing society being one of the Industrial Strategy’s Grand Challenges.